Gazprom told ICIS these volumes would be in addition to the gas it exports to Europe and that Russian supply to Europe would be unaffected.

A rough calculation based purely on the $400bn contract value and the reported annual export figure creates a price of $350/thousand cubic metres (kcm), or $9.74/MMBtu, for the delivery of the gas to China.

It is not clear, however, what is included in the $400bn figure and the actual price remains confidential.

The price of the Russian gas would need to compete with that of gas supplied to China by Turkmenistan. Although unlike Turkmen gas which enters China at Horgos on the western border with Kazakhstan, Russian gas would have the advantage of being delivered directly to areas of high demand in eastern China through the Russian border near Blagoveshchensk.

Chinese gas demand currently sits at 160-170bcm/year, but rapid growth is expected over the coming years. The move gives Gazprom an important new market for its gas exports.

China imported 18.6m tonnes of LNG in 2013, according to data from the International Group of Liquefied Natural Gas Importers.

Potential LNG imports could reach close to 50mtpa over the coming years based on present and future agreed contract volumes.

The Russian reserve base for supplying the gas will be the Chayandinskoye, Kovykta and Khandinsky fields in the Irkutsk area. Each side will be responsible for building infrastructure on its own territory, according to a statement by CNPC.

Gazprom forecasts the cost of investment on the Russian side alone at $55bn, which would be mainly directed into the Chayanda and Kovykta fields, with the Chinese side making a minimum investment in the project of $20bn. It is not clear whether China will be making any prepayment for Russian gas to help finance the project.

Offer of stake in Vladivostok project

Gazprom could offer a stake in the Vladivostok LNG project to CNPC, according to a report in local business daily Vedomosti which cited a source close to negotiations.

The development of the Power Of Siberia gas transmission system by Gazprom would bring gas from the fields set to supply China down to Vladivostok, past the Blagoveshchensk Russia-China border point.

As a basis for price negotiations, Gazprom could use the contractual formula at its Sakhalin-2 project. The average price of gas for Japanese offtakers from the project amounted to $512/kcm, the newspaper said.

The Vladivostok LNG project is expected to have a capacity of 10mtpa which could be further expanded to 15mtpa.

Under an official timeline, the first 5mtpa train of the project is due to come on line by 2018 and the second train by 2020.

However, there is speculation among industry sources that the project could be delayed by at least one year.

Vitaly Markelov, deputy chairman of Gazprom’s management committee, said last year that the company could offer a 49% equity stake in the project to a foreign partner who is willing to offtake at least 6mtpa from the facility.

Gazprom previously negotiated with several Japanese companies in an attempt to sell the stake. These included Itochu, Japex, Marubeni, Inpex and Cieco. The talks failed to materialise into a concrete deal.

A source close to Gazprom told ICIS on 21 May that there are no concrete plans for the sale of the stake.

“At this stage, the talks are more on a political level rather than [a] commercial one,” the source said.

Moreover, the source said the pricing mechanism used for the Sakhalin-2 project is unlikely to be used due to a dramatic change in LNG market dynamics.

“LNG would be competing with Russian pipeline gas [which is] also supplied by Gazprom. While I believe that LNG will come at a premium cost, the project has to make commercial sense,” the source said.

The source added that a concrete deal is unlikely to materialise before the autumn. Elizabeth Stonor/Roman Kazmin